BIR Ruling [DA-168-98]

April 28, 1998 BIR RULING [DA-168-98] SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your letter dated February 3, 1998 requesting for a ruling as to the applicable tax rate on the royalty payments to be made by your client, NEC Components Philippines, Inc. (NEC-Phils.), to its parent company, NEC Corporation of Japan (NEC-Japan), under the RP-Japan Tax Treaty. casia It is represented that NEC-Phils. s a domestic corporation registered with the Securities and Exchange Commission (SEC) on March 15, 1996; that it is also registered with the PEZA as an ecozone export enterprise engaged in the manufacture and export of electronic component, specifically printed writing board (PWB) and electromechanic devices (EM devices or EPZ relay); that it exports seventy percent (70%) of its total production; and that NEC-Phils., as a wholly owned subsidiary of NEC-Japan, remits royalties to its parent company. In reply, please be informed that pursuant to Article 12 of the RP-Japan Tax Treaty, pertinent portions of which read thus "ARTICLE 12 "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. "2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: (a) 15 percent of the gross amount of the royalties if the royalties are paid in respect of the use of, or the right to use, cinematographic film and films or tapes for radio or television broadcasting; (b) 25 percent of the gross amount of the royalties in all other cases. "3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 percent of the gross amount of the royalties." Since NEC-Phils, is engaged in the manufacture nd export of electronic components, specifically printed writing board (PWB) and electromechanic devices (EM devices or EPZ relay), then it is definitely not entitled to the 15% preferential tax rate on royalties paid in respect of the use of, or the right to use, cinematographic film or films or tapes for radio or television broadcasting. Nor will it be entitled to the preferential tax rate of ten percent (10%) since it is not a BOI-registered enterprise. Under the Tax Treaty, it is clear that only BOI-registered company engaged in preferred pioneer area of investment can avail of the said tax incentive. To explain further the inapplicability of the 10% preferential tax rate in the case of your client, it is worth noting that what it is contending is in the nature of a tax exemption, hence, it would be claiming, in effect, a lower tax rate than that to which it is actually entitled under the Tax Treaty. Under Philippine jurisdiction, it is clearly emphasized that tax exemptions must be categorically declared in terms that admit no doubt and/or vague implication. The provision under the Tax Treaty requiring registration with the BOI as a pre-requisite to the availment of the 10% preferential tax rate is expressed in terms too plain to be mistaken thus leaving no room to your contention that such incentive granted to BOI-registered enterprise should likewise apply to other similarly situated enterprises, such as PEZA-registered enterprises thereof. Furthermore, it is a basic principle in law that we cannot indulge in expansive construction and write into the law or treaty an exemption not therein set forth. Such being the case, since the activities conducted by NEC-Phils. does not fall squarely to the circumstances set forth under paragraph (2)(a) of Article 12 of the RP-Japan Tax Treaty nor under paragraph 3 thereof, this Office believes therefore, that NEC-Phils. royalty payments to its parent company, NEC-Japan, shall be subject to the 25% income tax on royalties set forth under paragraph (2)(b) of Article 12 of the Tax Treaty which is imposed on all other cases of royalty payments other than those mentioned above, i.e., 10% tax rate on royalty payments. Additionally, NEC-Japan is liable to a 10% value-added tax (VAT) on the royalties remitted to it by (NEC-Phils. pursuant to Section 4.102-1(b) of Revenue Regulations No. 7-95, as amended, which provides as follows: "The VAT on rentals and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. They duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." ( Emphasis supplied ) LLphil This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. [BIR Ruling UN-296-94 dated October 19, 1994 citing BIR Ruling UN-234-94 dated August 2, 1994] Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)